FSB Warns Private Credit's AI Bet Could Trigger Losses

The Financial Stability Board (FSB) has issued a stark warning that the private credit industry's growing role in financing the artificial intelligence boom could backfire spectacularly, with a sharp market correction potentially triggering 'sizeable' losses across the global financial system. The global watchdog's new report identifies tech, healthcare, and services as the largest borrowers from private credit funds — sectors deeply intertwined with the current AI investment surge.

The warning arrives at a critical juncture. Private credit has ballooned into a $2.1 trillion market globally, increasingly stepping in where traditional banks have pulled back, and a significant share of that capital is now flowing into AI-adjacent ventures that carry elevated risk profiles.

Key Takeaways From the FSB Report

• Private credit has become a primary funding source for tech and AI companies that may not qualify for traditional bank lending
• Healthcare, services, and technology sectors are the biggest borrowers from private credit funds
• A sharp correction in AI valuations could produce 'sizeable' losses across the private credit ecosystem
• The FSB monitors financial authorities including central banks across 24 countries
• Interconnections between private credit, banks, and institutional investors create potential contagion risks
• Transparency and data gaps in private credit markets make risk assessment difficult for regulators

Private Credit Becomes the AI Industry's Shadow Bank

The rise of private credit as a financing mechanism has coincided almost perfectly with the AI investment boom that began accelerating in late 2022 following the launch of OpenAI's ChatGPT. Unlike traditional bank loans or public bond markets, private credit offers faster, more flexible lending — attributes that appeal to fast-moving AI startups and mid-market tech companies scaling rapidly.

Private credit funds, managed by firms like Apollo Global Management, Blackstone, and Ares Management, have collectively deployed billions into companies building AI infrastructure, developing enterprise software powered by large language models, and operating AI-enabled healthcare platforms. These funds typically offer higher yields to investors — often 8% to 12% — but carry correspondingly higher risks.

The FSB's concern is straightforward: if the AI hype cycle reverses or key borrowers fail to deliver on revenue projections, the cascading impact could ripple far beyond Silicon Valley. Many institutional investors — pension funds, insurance companies, and sovereign wealth funds — have dramatically increased their allocations to private credit in recent years, seeking returns unavailable in public markets.

Why the AI Boom Makes Private Credit Riskier

The core risk the FSB identifies is concentration. A disproportionate share of private credit lending has flowed into sectors directly exposed to the AI investment cycle. Technology companies account for a significant portion of leveraged lending, and many of these borrowers are burning cash to build AI capabilities with uncertain payoff timelines.

Several factors amplify this risk:

• Valuation uncertainty: Many AI companies are valued on future revenue projections rather than current earnings, making default risk harder to price
• Rapid technological change: Today's cutting-edge AI model can become obsolete within months, undermining borrowers' competitive positions
• Concentration in few sectors: Tech, healthcare, and services dominate borrowing, reducing diversification benefits
• Limited transparency: Private credit deals are not publicly reported, making systemic risk harder for regulators to track
• Leverage layering: Some borrowers carry debt from multiple private credit funds, creating hidden leverage

Compared to the 2008 financial crisis — which was driven by opaque, interconnected lending in the mortgage market — private credit today shares some uncomfortable structural similarities. The FSB stops short of drawing that parallel directly but emphasizes that data gaps remain a 'key vulnerability.'

Healthcare and Services Sectors Add Complexity

While tech grabs the headlines, the FSB report highlights that healthcare and services are equally significant borrowers from private credit. These sectors have become deeply intertwined with AI through the adoption of machine learning for diagnostics, drug discovery, patient management, and operational automation.

Companies like Tempus AI, which went public in 2024, and numerous private healthcare AI firms have relied heavily on non-bank lending to fund growth. The healthcare AI market alone is projected to reach $188 billion by 2030, according to Grand View Research, creating enormous appetite for capital.

Services companies — spanning everything from AI-powered consulting to automated customer support platforms — represent another major borrower category. Many of these firms operate on thin margins while investing heavily in AI capabilities, making them particularly vulnerable to revenue shortfalls.

The FSB notes that a downturn in any one of these sectors could trigger a chain reaction. Private credit funds that suffer losses may be forced to tighten lending standards, cutting off capital to otherwise viable companies and accelerating a broader slowdown.

Interconnection Risks Could Amplify a Downturn

Perhaps the most concerning element of the FSB's analysis is the web of interconnections between private credit funds, traditional banks, insurance companies, and pension funds. Banks often provide leverage facilities to private credit funds, meaning losses at the fund level could flow back into the banking system.

Insurance companies have become among the largest investors in private credit. Apollo's Athene unit, for example, manages over $300 billion in insurance assets and is a major private credit investor. A sharp correction could impair insurance company balance sheets, with downstream effects on policyholders.

Pension funds worldwide have increased private credit allocations from roughly 2% to 5-7% of portfolios over the past decade. The California Public Employees' Retirement System (CalPERS), Canada's CPPIB, and numerous European pension funds have made significant commitments. Losses here would directly affect retirees' financial security.

The FSB emphasizes that these interconnections mean private credit is no longer a niche corner of finance — it is systemically relevant. 'The growth of private credit markets warrants close monitoring,' the report states, noting that regulatory frameworks have not kept pace with the sector's expansion.

What This Means for the AI Industry

For AI companies and investors, the FSB's warning carries practical implications that extend well beyond regulatory policy.

For AI startups and growth-stage companies, private credit tightening could reduce access to capital precisely when many firms are racing to scale. Companies that have relied on private credit for expansion may need to pursue alternative funding — whether venture capital, public markets, or strategic partnerships — potentially at less favorable terms.

For enterprise AI buyers, a credit-driven shakeout could accelerate consolidation in the AI vendor landscape. Companies with weak balance sheets may be acquired or shuttered, creating risk for enterprises that have committed to specific AI platforms.

For investors, the warning underscores the importance of due diligence in AI-related private credit exposure. Funds that have concentrated lending in early-stage or speculative AI ventures carry materially different risk profiles than those lending to established tech companies with recurring revenue.

The broader AI ecosystem should take note: the availability of cheap, flexible private credit has been a tailwind for the entire industry. If that tailwind reverses, the competitive landscape will shift dramatically.

Looking Ahead: Regulatory Action and Market Adjustment

The FSB's report is unlikely to result in immediate regulatory action, but it sets the stage for increased scrutiny. Several developments are worth watching in the coming months:

First, the European Central Bank and Bank of England have both signaled interest in extending oversight to private credit markets. New reporting requirements could emerge as early as 2026, forcing greater transparency in AI-related lending.

Second, the U.S. Securities and Exchange Commission has already implemented new rules requiring private fund advisers to provide quarterly statements with detailed performance data. Further tightening is possible under the current regulatory trajectory.

Third, market dynamics may self-correct before regulators act. Private credit yields have begun compressing as more capital floods into the space, potentially reducing the risk premium that compensates for AI-sector volatility.

The fundamental question remains: is the AI boom generating sufficient real economic value to justify the capital being deployed, or is private credit inflating a bubble that will eventually burst? The FSB clearly leans toward caution. For an industry built on optimism about transformative technology, that warning deserves serious attention.

As AI spending continues to accelerate — with companies like Microsoft, Google, and Amazon committing over $200 billion in combined AI capital expenditure for 2025 alone — the private credit market's role as a secondary funding engine will only grow. Whether that growth proves sustainable or reckless may be one of the defining financial questions of the decade.